After AOL Rules Out TechCrunch Sale to Arrington, Tense Severance Negotiations Taking Place

AOL is still engaged in complex severance negotiations with TechCrunch founder and editor Michael Arrington, which some close to the situation warn could eventually end in court if not resolved.

Sources said the company has so far refused Arrington’s bold demand, posted on TechCrunch itself, to either give the popular tech news site “editorial independence” or sell it back to him.

The pugnacious post seems to have left AOL CEO Tim Armstrong with no other choice, said sources, but to enter into negotiations with Arrington to part ways.

At this point, for all intents and purposes, he is already gone.

That could change, of course, but the controversy has put Armstrong in a tough position, with the choice of possibly losing the momentum of a successful site or looking as if an employee can push him around to get what he wants.

And, let’s not forget — even though all the parties are acting as if they’re living in a really nasty sandbox — AOL is a public company.

But, like they say, it’s not over until it’s over.

Sources said the sides are still caught on the terms of the parting, including whether Arrington and other TechCrunch staffers will get the big-money earn-outs based on their staying at AOL, as well as what would happen if Arrington were to start a competing blog site and siphon away editorial staffers from TechCrunch.

Hanging over the proceedings: Next week’s lucrative TechCrunch Disrupt conference in San Francisco, where Arrington and other TechCrunch staffers interview tech luminaries and show off new start-ups.

Also in play is the status of the site’s writers. At least one — the windswept Paul Carr — has written on TechCrunch that he will resign if Arrington is not allowed to handpick his successor.

The situation between the popular tech blogger and top execs at the Internet company — which bought his site earlier this year — comes after a week of increasingly testy back and forth between them, after it was revealed that Arrington was starting his own $20 million venture fund called CrunchFund.

The move caused a media firestorm over the ethics and propriety of the move, which was followed by an ugly internal war at the company, with Arrington and TechCrunch staffers on one side and Armstrong and Huffington on the other.

After many confusing messages from AOL, Arrington was removed from his longtime job at TechCrunch and placed in its venture arm, after editorial objections from Huffington.

That had supposedly been the the plan until it all blew up, about what the CrunchFund deal — which includes $10 million from AOL — meant to TechCrunch and its news gathering.

That seemed clear from a widely cited quote from CrunchFund investor and well-know Silicon Valley entrepreneur Reid Hoffman to me last week:

“TechCrunch will get some real deal flow from entrepreneurs that we would otherwise not see, because they have established a prominent position as the SV/Tech industry information feed. As many tech entrepreneurs read it — both within Silicon Valley and globally — and view the information news feed to be their target for announcing themselves to the world, CrunchFund will have access to deal flow to these diverse and early stage companies. Some of these companies will be the kind of early stage companies with billion-dollar potential that Greylock invests in.”

There you had it: No one can afford to be out of the deal flow in these competitive times, even if it means cutting corners and using a tech news site as fodder.

Arrington obviously has another view of the deal he struck with Armstrong and, sources said, wants his powerful tech news platform back. He has been talking to many Silicon Valley power players about the situation, said sources.

The deal group interested in buying back the site includes TechCrunch’s top exec Heather Harde and editor/writers Sarah Lacy and Erick Schonfeld.

More to come in this mess, which rivals the one now taking place between fired Yahoo CEO Carol Bartz and the Silicon Valley Internet giant.

I think the NSA has a job to do and we need the NSA. But as (physicist) Robert Oppenheimer said, “When you see something that is technically sweet, you go ahead and do it and argue about what to do about it only after you’ve had your technical success. That is the way it was with the atomic bomb.”

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